Can You Sell a House With a Mortgage?

Selling a home with an existing mortgage is a common practice. The process involves using sale proceeds to pay off the outstanding mortgage balance and associated costs. This ensures the property’s title is clear for the new owner. This allows individuals to transition from one property to another even if their current home is still subject to a loan.

Gathering Essential Mortgage Information

Before listing a home for sale, gather specific details about the existing mortgage. The first step involves obtaining an accurate payoff statement or quote from the current mortgage lender or servicer. This document outlines the exact amount required to fully satisfy the loan on a particular date.

A mortgage payoff statement includes the remaining principal balance, accrued interest up to the specified payoff date, and various fees. Fees can include administrative, recording, or late charges. The statement also provides a “good-through” or expiration date, indicating how long the quoted payoff amount remains valid, as interest accrues daily.

Review your mortgage terms for any prepayment penalties. A prepayment penalty is a fee charged by some lenders if a mortgage is paid off early, often within a specific number of years. This clause, if present, is outlined in the original loan agreement and can range from a percentage of the remaining loan amount or a certain number of months’ interest. Understanding whether the mortgage is assumable is also relevant, though this is rare; an assumable mortgage allows a buyer to take over the seller’s existing loan terms. You can request this information from your loan servicer through online portals, phone calls, or formal written requests.

The Mortgage Settlement Process at Closing

The actual settlement of the existing mortgage occurs during the closing of the home sale. Once a sales agreement is in place, the title company or escrow agent assumes a central role in facilitating the mortgage payoff. They are responsible for collecting all necessary funds and ensuring the property’s title is cleared.

The buyer’s funds, which include their down payment and any new mortgage loan proceeds, are directed to the title or escrow company. These funds are then used to pay off the seller’s outstanding mortgage directly to their lender. This ensures the seller’s loan is satisfied in full, preventing any remaining claims on the property.

If a prepayment penalty applies to the seller’s mortgage, this fee is also settled at closing, deducted from the sale proceeds. After the loan is fully paid, the mortgage lender is responsible for issuing a lien release. This legal document confirms that the mortgage debt has been cleared and removes the lender’s claim on the property. The title company handles the recording of this lien release with the appropriate county office, ensuring the public record reflects that the property is free of the former mortgage lien.

Navigating Different Equity Scenarios

The financial outcome of selling a home with a mortgage depends on the relationship between the sale price and the outstanding loan balance, known as equity. When the sale price of the home exceeds the total amount owed on the mortgage and other selling costs, the seller has positive equity. After the mortgage is paid off and all closing costs are covered, the remaining funds are disbursed to the seller as net proceeds.

Conversely, a challenging situation arises when the sale price is less than the outstanding mortgage balance, resulting in negative equity, often referred to as being “underwater.” In such cases, the seller would need to bring cash to closing to cover the difference between the sale price and the amount owed. A potential option for homeowners facing negative equity is a “short sale.”

A short sale occurs when the mortgage lender agrees to accept a sale price that is less than the full amount owed on the mortgage. To qualify for a short sale, homeowners must demonstrate a financial hardship and obtain approval from their lender. While a short sale can help avoid foreclosure, it often negatively impacts the seller’s credit history and requires careful negotiation with the lender. In the rare instance where the sale price exactly matches the mortgage balance and other costs, the seller would break even, with no proceeds or additional funds required.

Other Financial Considerations When Selling

Beyond the mortgage payoff, sellers incur additional costs that impact their net proceeds from a home sale. Real estate agent commissions represent a substantial expense, ranging from 4% to 6% of the home’s final sale price. This commission is split between the seller’s agent and the buyer’s agent.

Sellers are also responsible for a share of closing costs, which typically fall within 1% to 3% of the sale price. Common seller-paid closing costs include transfer taxes, fees imposed by state or local governments for transferring property ownership, and owner’s title insurance, protecting the buyer from future title defects. Other costs involve escrow or settlement fees, attorney fees if legal counsel is retained, and prorated property taxes or homeowners association (HOA) fees up to the closing date.

Sellers might incur optional expenses to prepare their house for sale, such as repairs identified during inspections, professional staging, or deep cleaning services. While these costs are not mandatory, they can influence the property’s marketability and final sale price. All these financial considerations are deducted from the sale proceeds, affecting the final amount a seller receives.